Empire State Realty Trust (ESRT), the real estate investment trust that owns the American cultural icon whose opening coincided with the Great Depression, will attempt to raise $1.0 billion dollars in its upcoming IPO on Wednesday October 2, 2013. ESRT will offer 71.5 million shares at an expected price range of $13-15; if it can hit the midpoint of that range at $14, the New York, New York-based trust would command a market value of $3.4 billion. The lengthy list of underwriters will have the opportunity to purchase another 10.725 million shares.
Joint Managers: Goldman Sachs, BofA Merrill Lynch
Co-Managers: Barclays, Citi, Deutsche Bank, Wells Fargo Securities, Capital One Securities, HSBC Corporation, KeyBanc Capital Markets, PNC Capital Markets, RBS
Empire State Realty Trust is a massive real estate trust that owns, manages, operates, acquires, and re-positions Manhattan office and retail properties. The trust is focused centrally on the Empire State Building; ESRT holds 17 other properties, as well, but the main sell is certainly the iconic skyscraper. The REIT was put together and pushed forward in late 2011 by Malkin Holdings, which manages the Empire State Building and its approximately 2800 investors. Despite some initial concerns on the part of some investors (not to mention several lawsuits on the subject), Malkin was ultimately successful in leading the IPO, and is the functional predecessor of the REIT.
Malkin has invested massively in renovating its Manhattan office space; from 2002 through September 30, 2011, the firm spent $296 million. These renovations are expected to be completed (at significant further cost) by the end of 2013 with the exception of work on the Empire State Building, which will not be complete until approximately 2016.
ESRT offers the following figures in its S-11A balance sheet for the nine months ending September 30, 2011:
Total Net Revenue: $382,203,000
Net Income: $71,045,000
Total Assets: $2,769,356,000
Total Liabilities: $1,300,016,000
Stockholders' Equity: $1,469,340,000
ESRT's combination of stable, experienced management, current profitability and extremely high name recognition - it's hard to beat the Empire State Building in real estate - make it a buy for us if it prices in the projected range of $13 to $15. We also expect to see a lot of interests on the part of retail investors.
ESRT seems likely to grow even more profitable as it pushes forward with the renovation and reorganization of the Empire State Building, which will allow it to offer larger blocks of office space to higher-value tenants. The fact that the REIT is already profitable despite the high vacancy rates in the Empire State Building caused by the process of reorganization speaks to the value of the properties ESRT owns; maybe Manhattan real estate will someday go out of style, but we don't think that day is coming any time soon.
ESRT is in the process of re-positioning and renovating the Empire State Building in order to attract high quality tenants, and has already seen significant success in that effort with new tenants including LF USA; Skanska; Coty, Inc. (COTY); the Federal Deposit Insurance Corporation; Funaro & Co.; LinkedIn (LNKD); Noven Pharmaceuticals (NOVN); People's Daily Online USA; Taylor Global; Turkish Airlines; and World Monuments Fund. The completion of the renovation in approximately 2016 and the continued efforts of ESRT to remove lower quality tenants in favor of more credit-worthy tenants should allow for continued revenue growth.
New York City real estate is, of course, a brutally competitive business, and ESRT faces a host of powerful competitors seeking to entice the same high-end tenants. In particular, the One World Trade Center tower provides an extremely attractive alternative to those tenants. ESRT has shown a willingness and ability to fight off potential competitors, however, having launched a semi-successful campaign to delay or deter the construction of the planned Vornado Tower at 15 Penn Plaza in 2010.
Chairman, CEO and President Anthony Malkin has literally been raised in the real estate business as the son of Chairman Emeritus Peter Malkin and the grandson of Lawrence A. Wien, a legendary real estate developer who headed an investment group that purchased the Empire State Building in 1961. Most of his experience has been with Malkin Holdings, and his extensive knowledge of Malkin Holdings in particular and the real estate business in general are considered strong assets to the REIT.
Additional disclosure: This article was written for informational purposes and is partly based on the company's S-11A. Investors should read the S-11A and consult with their financial adviser before making any investment decisions.